Legislative Analyst's Office

Analysis of the 2003-04 Budget Bill

The State Water Resources Control Board (SWRCB), in conjunction with nine
semiautonomous regional boards, regulates water quality in the state. The
regional boards—which are funded by the state board and are under the state
board's oversight—implement water quality programs in accordance with policies,
plans, and standards developed by the state board.

The board carries out its water quality responsibilities by (1) establishing
wastewater discharge policies and standards; (2) implementing programs to
ensure that the waters of the state are not contaminated by underground or
aboveground tanks; and (3) administering state and federal loans and grants to
local governments for the construction of wastewater treatment, water
reclamation, and storm drainage facilities. Waste discharge permits are issued
and enforced mainly by the regional boards, although the state board issues
some permits and initiates enforcement actions when deemed necessary.

The state board also administers water rights in the state. It does this by
issuing and reviewing permits and licenses to applicants who wish to take water
from the state's streams, rivers, and lakes.

The budget proposes expenditures of $739.4 million from various funds
for support of SWRCB in 2003-04. This amount is a decrease of
$332 million, or about 31 percent, below estimated current-year
expenditures. Most of this decrease reflects a reduction in bond-funded
expenditures, mainly for loans and grants for local water quality and water
recycling projects. Despite this overall spending reduction, the budget does
propose an increase of $114.7 million from the recently passed
Proposition 50 and $65.9 million from Proposition 13 for various
water quality and water recycling grant programs. Other major budget proposals
include (1) a $12.8 million reduction in General Fund expenditures for
various water quality monitoring programs and water rights activities, (2) a
shift of $13.6 million from the General Fund to fees, thereby eliminating
General Fund support for the board's core regulatory program, and (3) a
one-time increase of $15 million in payments from an insurance fund to
underground storage tank owners and operators for the cleanup of leaking tanks.

The State Water Resources Control Board's water rights program is
responsible for permitting and enforcing a subset of California's water rights.
In the sections that follow, we discuss the current funding for the program,
conclude that fees assessed on water rights holders should fully fund the
board's water rights activities, and recommend legislation that would increase
current application fees and establish ongoing compliance fees on water rights holders.

The board's water rights program permits and enforces water rights
established after 1914. The board assesses nominal one-time fees on water
rights applications, but the General Fund primarily supports the program.

Water Rights Program Overview. The SWRCB's water rights
program is responsible for (1) issuing new water rights for water bodies that
have not already been fully "allocated" to water rights holders, (2)
approving changes to existing water rights (this may be to facilitate a water
transfer), and (3) conducting ongoing enforcement and compliance monitoring of
water rights under its jurisdiction. The board's enforcement authority applies
only to water rights established after 1914.

Water Rights Permitting Process. The water rights permits
issued by the board specify the purpose of use, point of diversion, quantity,
and other conditions that protect prior water rights holders, the public
interest, and the environment. As part of the permit issuance process, the
board publicly notices the permit application, allows for public comment, and
conducts various environmental reviews as required by statute, including the
California Environmental Quality Act (CEQA). Other state agencies, including
the Department of Fish and Game (DFG), may also be involved in the
environmental review process for water rights.

Licensing and Ongoing Enforcement Activities. After a water
right has been granted and the terms of the permit have been established, the
board will inspect the water project. Before a project can be licensed, all of
the terms of the permit must be met and the largest volume of water under the
permit must be put to beneficial use. This license represents the final
confirmation of the water right and remains effective as long as its conditions
are fulfilled and the water diverted continues to be used for a beneficial
nonwasteful purpose. The board has authority to enforce the conditions of
permits and licenses, and it does so by conducting inspections and investigating
complaints about the water use behavior of water rights holders.

Fee Support Is Minimal. Currently, a one-time nominal
application fee is assessed on all water rights applications, varying depending
on the amount of the proposed diversion and/or storage. The minimum application
fee is $100. The current statutorily established fee schedule was last revised
in the mid-1980s. These fees raise an insignificant amount of revenue—only
about $30,000—when compared to program expenditures of $11.1 million in
the current year. Applicants proposing large water diversions that are likely
to have an impact on the environment pay for the preparation of any
environmental documents required to comply with CEQA. However, the applicant
does not cover the department's costs of reviewing these documents.

Budget Proposal. The budget proposes expenditures of
$8.7 million ($7.2 million General Fund) to support the water rights
program in 2003-04. This reflects the Governor's proposal to reduce the General
Fund support for the program by $3.3 million, a nearly 30 percent
reduction in General Fund support. The vast majority of support for the program
is proposed from the General Fund, with the balance coming from special funds,
federal funds, and reimbursements (including fees). Fee revenues are estimated
to cover less than 1 percent of program expenditures.

We recommend that legislation be enacted that increases the existing
one-time fees on water rights applications and establishes a new annual compliance
fee assessed on all water rights holders under the board's jurisdiction, in
order to fully replace the General Fund support proposed for the board's water
rights program. We further recommend the enactment of legislation to establish
a special fund for the deposit of the revenues generated by the water rights
fees. (Reduce Item 3940-001-0001 by $7.2 million and increase new special
fund item by a like amount.)

Water Rights Program Benefits Permit Applicants. Water
appropriated under water rights permits issued by SWRCB is used by permittees for
a variety of purposes, including municipal and industrial uses, irrigation,
hydroelectric generation, and livestock watering. In most cases, the water
provides some form of economic benefit to the water rights permittee. For
example, a municipal water district may request an increased diversion in order
to serve a new housing subdivision, or an agricultural business may wish to
divert additional water to irrigate new land to put into agricultural
production. In all such cases, the water rights applicant directly benefits
from the permit issued by SWRCB.

Water Rights Program Provides Ongoing Benefits to Water Rights
Holders. Similarly, we think that the water rights program provides ongoing
benefits directly to water rights holders. This is mainly because SWRCB is
charged with assuring that applications for new water rights do not cause harm
to any other existing legal water rights holder. In addition, the program
conducts routine compliance and inspections of existing water rights. These
activities also provide direct benefits to water rights holders by ensuring the
terms and conditions of the water rights permits and licenses held by others
are upheld.

California's Fees Are Much Lower Than Other States' Fees. Several
other states around the nation have a more comprehensive water rights fee
structure than California in terms of the proportion of program costs covered
by fees. In some cases, these fees completely cover the costs associated with
the state's program for regulating water rights. For example, in Arizona, all
nonexempt water rights holders are required to register their water rights
annually. Information from this registration is then used to compute a per acre-foot
fee on water being diverted for beneficial uses. The revenues generated from
this fee are used to fully fund the water rights program, along with other
water-related programs. New Jersey has a similar fee structure, but the fee is
assessed only on water rights holders that divert in excess of 100,000 gallons
per day. This fee is also assessed and reviewed annually and adjusted to
reflect changes in the cost of administering the water rights program.

Water Rights Fee Structure Should Be Revised. Since water
rights holders benefit directly from all aspects of the water rights
program—including permit issuance and compliance monitoring—we conclude that
the existing fee structure should be revised so that fee revenues replace all
General Fund support budgeted for the board's program. These fees should also
cover water-rights-related costs incurred by other state departments (such as
DFG). To accomplish this, we recommend the enactment of legislation to (1)
increase existing water rights application fees and (2) establish an annual
water rights compliance fee. We further recommend that the Legislature enact
legislation to establish a special fund for the deposit of these fee revenues,
with expenditures from the fund subject to appropriation by the Legislature. By
creating the special fund, the
Legislature will be able to exercise oversight over the expenditure and use of
the fees.

Finally, as a result of creating this new fee structure, we recommend that
the General Fund in SWRCB's budget be reduced by $7.2 million and the new
special fund item be increased by a like amount.

The budget proposes a substantial General Fund reduction to the water
rights program. This reduction would exacerbate the already substantial backlog
of work in the program. The Legislature may wish to consider addressing this
backlog when establishing a revised fee structure for the program.

Program Has Significant Backlog. The board receives an average
of 170 applications for new water rights and changes to existing water rights
each year. Existing funding levels allow the board to process around 150
applications annually. However, the board currently has a backlog of over 680
pending applications. Even with no new applications for permits, it would take
over four years to process all of the backlogged applications at the current
rate. The board also issues approximately 125 licenses annually on projects
that have satisfied all of the conditions of their permits. Currently over
1,000 permittees are waiting to be inspected and licensed. In addition, staff
inspect about 120 water rights annually at current funding levels. This
reflects annual monitoring of less than 1 percent of the water rights
under the board's enforcement jurisdiction.

Proposed Budget Reduction Will Exacerbate Backlog. The budget
proposes a $3.3 million General Fund reduction to the water rights program
in the budget year. A reduction of this magnitude will likely have a
significant adverse impact on the board's ability to process applications in a
timely manner. This will also have the effect of increasing the backlog of
water rights applications and licenses that need to be evaluated and will
significantly reduce the minimal compliance activities currently performed by
the department.

Fee Legislation in Context of Program Funding Requirements. As
mentioned previously, we have identified a considerable backlog in the water
rights program. In addition, the Governor's proposed reduction to the program
is likely to exacerbate this backlog. Given this, the Legislature may wish to
develop the fee legislation recommended above in the context of assessing the
program's funding requirements. This is especially critical for processing
applications for new water diversions, since significant delays could
jeopardize the development of new water supplies.